ConocoPhillips: You Will Regret Investing in This Oil Stock

ConocoPhillips (COP) produced 1,554 MBOED during the third quarter that was 81 MBOED more than the same period last year. For the fourth quarter the company expects a production of 1,585 MBOED to 1,625 MBOED and 1,585 MBOED to 1,595 MBOED for the full year 2015.

However, ConocoPhillips does not have a very handsome debt situation. It has got a cash of $2.4 billion, which was about $5.1 billion at the beginning of the year.

It generated $5.8 billion from operating activities excluding working capital in the first nine months and spent $7.9 billion in capital expenditure through the third quarter. Operating cash flow from continuing operations during the quarter was $1.9 billion.

The good thing was that there was no increase in debt in the third quarter and that the company expects to generate another $1 billion to $2 billion per year as part of its routine high grading process. But still a total debt of nearly $25 billion is a bit too much to say that ConocoPhillips is in any sort of comfort on this front.

ConocoPhillips and oil

Even the largest oil companies including ConocoPhillips have seen huge declines in their earnings and in turn their valuations. However, the good thing with ConocoPhillips’ peers is that they have quite a diversified and balanced portfolio that was able to offset the effect of oil price decline. Peers like Exxon Mobil (XOM) and Chevron (CVX), have considerable downstream businesses too whose profit margins increase when oil prices decrease because their input costs decrease as a result. On the other hand, ConocoPhillips is a purely upstream company since it spun off its downstream business in 2012, and so it doesn’t have anything to offset the negative effects of the oil slack.

The problem here is that the downturn in the commodity market has stretched very long. It’s been about two years since we have realized that there is an unnecessary surplus building in the industry due to a blind rage to match the demand for energy. On realizing this, the companies have changed their priorities from buying shale assets for more and more production to selling their non-strategic assets in the last eighteen months or so. Still, the aggregate production is increasing. The growth has slowed down but there is growth.


ConocoPhillips is in a weak position. Its margins have been shrinking because of continuous decline in oil prices. It has not been as successful as its peers in reducing its costs and expenditures. Despite production cuts and asset divestitures, the industry has not been able to reduce production compared to the last year putting a downward pressure on prices. It lacks downstream operations which could have partially offset the negatives of weakness commodity prices. In the end, the balance sheet is not a strong one given the ratio between debt and cash. Therefore ConocoPhillips is no way the stock of choice for an investor.

Published on Nov 13, 2015
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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